Borrowing for College: How Much is Too Much?

Too much of a good thing can be bad, as Shakespeare demonstrated, and the axiom is true of student borrowing for college.

Students may believe it is difficult enough worrying about the big exam next week or whom to take to the spring dance. Yet students must stretch themselves and imagine a much greater consequence, years into the future, when they consider how much money to borrow to pay for a higher education.

The first step is to try to avoid borrowing in the first place, experts say. “Students should thoroughly explore scholarships, grants and community service awards before they begin borrowing for college,” said Marianne Ragins, author of Winning Scholarships for College and publisher of ScholarshipWorkshop.com, based in Centreville, Virginia.

The next step is to set up a budget based on the salary you’ll likely make after you graduate from college, Ragins said. Students can check average starting salaries in their field at Web sites such as Salary.com and the U.S. Department of Labor’s Occupational Outlook Handbook.

Most importantly, students must view each dollar they borrow for college as a dollar that they will be unable to spend to buy such essentials as a car, a house, or to start a family, and a dollar that they cannot put into a retirement-savings account. “It’s important for families to work that through, to write down numbers and understand what you are signing up for,” said Rita Johnson, a financial advisor at the Millstone Evans Group of Raymond James & Associates, a brokerage firm in Boulder, Colorado.

If there is ever a time for discipline and independence, this is it, experts say. That’s because lenders are in the business of urging students to borrow as much as possible, and won’t warn of the financial consequences.

After students come up with a number for the amount they expect to borrow, they should make sure the loan amount, plus other expected debts such as rent and car payments, do not exceed 33 percent of their expected future income, Johnson said. Free online calculators are available to help put together a budget and estimate future costs. If college-loan and other debts consume more than a third of future income, look for alternatives.

“It’s going to be each student’s decision – is it absolutely worth it to me to go to the University of Chicago rather than to a public college, or must I go to Juilliard or another outstanding ‘name’ college rather than a cheaper alternative?” said Johnson.

Students must take into account new laws and policies that make debts nearly impossible to write off. Student loans are no longer easily swept away under today’s tougher bankruptcy laws. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 extended non-dischargeable debt to student loans from private lenders, so they cannot be automatically written off. Instead, people seeking bankruptcy protection must prove that they cannot repay a student loan and still maintain a minimally adequate standard of living.

The idea that using credit cards to pay for college will be easier is a delusion with terrible consequences, said Robert M. Manning, author of Credit Card Nation and director of the Center for Consumer Financial Services at the Rochester Institute of Technology’s College of Business. Credit cards carry even higher fees than traditional student loans, leaving the unsuspecting to fall into a situation where it would take their entire lifetimes to pay off a credit-card debt, Manning said. Students who want to attend graduate school or another professional school after college must include those debts in any calculation of their future standard of living, Manning said.

“It forces people to say, ‘If I’m going to graduate with $50,000 of student-loan debt, how am I going to make it on a $40,000 salary?’” he said.